Management Question

‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬

Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University

College of Administrative and Financial Sciences

Assignment 2
Project Management (MGT 323)
Due Date: 02/11/2024 @ 23:59
Course Name: Project Management

Student’s Name:

Course Code: MGT323

Student’s ID Number:

Semester: First Semester

CRN:
Academic Year:2024-25

For Instructor’s Use only
Instructor’s Name:
Students’ Grade: /10

Level of Marks: High/Middle/Low

General Instructions – PLEASE READ THEM CAREFULLY
•
•
•
•
•
•
•
•

The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted. Peer-Reviewed Journals are required as
references.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.

• Do not make any changes in the cover page.

Restricted – ‫مقيد‬

Assignment Workload:
• This Assignment comprise of a Case Study and discussion questions.
• Assignment is to be submitted by each student individually.

Assignment Purposes/Learning Outcomes:
After completion of Assignment-2 students will be able to understand the

1. Recognize the steps of planning process in the project management.
(L.O-1.2)
2. Estimate the project budget and cost control. (L.O-2.2)
3. Analyze to work effectively and efficiently as a team member for
project related cases. (L.O-3.1)

Assignment-2
Assignment Case Study:

(Marks-6)

Please read the Case-5.2 “Post-Graduation Adventure.” from Chapter 5
“Estimating Project Times and Costs” given in your textbook – Project
Management: The Managerial Process 8th edition by Larson and Gray page
no: 164 also refer to specific concepts you have learned from the chapter to
support your answers. Answer the questions asked in case study as
deliverables where you should consider the milestones and technical
requirements.
1. Assume you are either Mike or Josh; how would you go about making
a decision using project management methodology? Explain in 250
words (2 Marks).
2. Looking first at only cost, what decision would you make? Explain in
250 words (2 Marks).

Restricted – ‫مقيد‬

3. After cost, what other factors should be considered before making a
decision? Explain in 250 words (2 Marks)

Discussion Questions

(4 Marks)

4. Discuss top-down and bottom-up estimating and different approaches
used. (250 words) (2 Marks)
5. Discuss different project management structures. (250 words) (2
Marks)

Answers:

Restricted – ‫مقيد‬

Restricted – ‫مقيد‬

page 134

CHAPTER

FIVE

5
Estimating Project Times and
Costs
LEARNING OBJECTIVES
After reading this chapter you should be able to:
5-1

Understand estimating project times and costs is the foundation for project
planning and control.

5-2

Describe guidelines for estimating time, costs, and resources.

5-3

Describe the methods, uses, and advantages and disadvantages of top-down
and bottom-up estimating methods.

5-4

Distinguish different kinds of costs associated with a project.

5-5

Suggest a scheme for developing an estimating database for future projects.

5-6

Understand the challenge of estimating mega projects and describe steps
that lead to better informed decisions.

5-7

Define a “white elephant” in project management and provide examples.

A5-1

Use learning curves to improve task estimates.

OUTLINE

5.1

Factors Influencing the Quality of Estimates

5.2

Estimating Guidelines for Times, Costs, and Resources

5.3

Top-Down versus Bottom-Up Estimating

5.4

Methods for Estimating Project Times and Costs

5.5

Level of Detail

5.6

Types of Costs

5.7

Refining Estimates

5.8

Creating a Database for Estimating

5.9

Mega Projects: A Special Case

Summary
Appendix 5.1:

Learning Curves for Estimating

page 135

Plans are of little importance, but planning is essential.
— Winston Churchill, former British prime minister

LO 5-1
Understand estimating project times and costs is the foundation for project planning and
control.

Estimating is the process of forecasting or approximating the time and cost
of completing project deliverables. Estimating processes are frequently
classified as top-down and bottom-up. Top-down estimates are usually done
by senior management. Management will often derive estimates from
analogy, group consensus, or mathematical relationships. Bottom-up
estimates are typically performed by the people who are doing the work.
Their estimates are based on estimates of elements found in the work
breakdown structure. Exhibit 5.1 summarizes some of the key reasons for
estimating.
EXHIBIT 5.1
Why Estimating Time and Cost Is Important
Estimates are needed to support good decisions.
Estimates are needed to schedule work.
Estimates are needed to determine how long the project should take and its cost.
Estimates are needed to determine whether the project is worth doing.
Estimates are needed to develop cash flow needs.
Estimates are needed to determine how well the project is progressing.

All project stakeholders prefer accurate cost and time estimates, but
they also understand the inherent uncertainty in all projects. Inaccurate
estimates lead to false expectations and consumer dissatisfaction. Accuracy
is improved with greater effort, but is it worth the time and cost? Estimating
costs money! Project estimating becomes a trade-off, balancing the benefits
of better accuracy against the costs for securing increased accuracy.
page 136

Cost, time, and budget estimates are the lifeline for control; they serve
as the standard for comparison of actual and plan throughout the life of the
project. Project status reports depend on reliable estimates as the major
input for measuring variances and taking corrective action. Ideally, the
project manager, and in most cases the customer, would prefer to have a
database of detailed schedule and cost estimates for every work package in
the project. Regrettably, such detailed data gathering is not always possible
or practical, and other methods are used to develop project estimates.

5.1 Factors Influencing the Quality of
Estimates
A typical statement in the field is the desire to “have a 95 percent
probability of meeting time and cost estimates.” Past experience is a good
starting point for developing time and cost estimates. But past experience
estimates must almost always be refined by other considerations to reach
the 95 percent probability level. Factors related to the uniqueness of the
project will have a strong influence on the accuracy of estimates. Project,
people, and external factors all need to be considered to improve the quality
of estimates for project times and costs.

Planning Horizon
The quality of the estimate depends on the planning horizon; estimates of
current events are close to 100 percent accurate but are reduced for more
distant events. For example, cost estimates for a party you are organizing
this weekend should be much more accurate than the estimates for a party
that will take place in six months. Now imagine how difficult it would be to
estimate the total cost of a four-year transportation project. The accuracy of
time and cost estimates should improve as you move from the conceptual
phase to the point where individual work packages are defined.

Project Complexity
Time to implement new technology has a habit of expanding in an
increasing, nonlinear fashion. Sometimes poorly written scope

specifications for new technology result in errors in estimating times and
costs.

People
The people factor can influence the quality of time and cost estimates. For
example, accuracy of estimates depends on the skills of the people making
the estimates. How familiar are they with the task they are estimating?
page 137

Project Structure and Organization
Which project structure is chosen to manage the project will influence time
and cost estimates. One of the major advantages of a dedicated project team
is the speed gained from concentrated focus and localized project decisions.
This speed comes at an additional cost of tying up personnel full time.
Conversely, projects operating in a matrix environment may reduce costs by
more efficiently sharing personnel across projects but may take longer to
complete, since attention is divided and coordination demands are higher.

Padding Estimates
In some cases people are inclined to pad estimates. For example, if you are
asked how long it takes you to drive to the airport, you might give an
average time of 30 minutes, assuming a 50/50 chance of getting there in 30
minutes. If you are asked the fastest you could possibly get there, you might
reduce the driving time to 20 minutes. Finally, if you are asked how long
the drive would take if you absolutely had to be there to meet with the
president, it is likely you would increase the estimate to, say, 50 minutes to
ensure not being late.
In work situations where we are asked for time and cost estimates, most
of us are inclined to add a little padding to reduce the risk of being late. If
everyone at all levels of the project adds a little padding to reduce risk, the
project duration and cost are seriously overstated. This phenomenon causes
some managers or owners to call for a 10–15 percent cut in time and/or cost
for the project. Of course, the next time the game is played, the person
estimating cost and/or time will pad the estimate to 20 percent or more.

Clearly such games defeat chances for realistic estimates, which is what is
needed to be competitive.

Organizational Culture
Organizational culture can significantly influence project estimates. In
some organizations padding estimates is tolerated and even privately
encouraged. Other organizations place a premium on accuracy and strongly
discourage estimating gamesmanship. Organizations vary in the importance
they attach to estimates. The prevailing belief in some organizations is that
detailed estimating takes too much time and is not worth the effort or that
it’s impossible to predict the future. Other organizations subscribe to the
belief that accurate estimates are the bedrock of effective project
management. Organizational culture shapes every dimension of project
management; estimating is not immune to this influence.

Other Factors
Finally, nonproject factors can impact time and cost estimates. For example,
equipment down-time can alter time estimates. National holidays,
vacations, and legal limits can influence project estimates. Project priority
can influence resource assignment and impact time and cost.
Project estimating is a complex process. The quality of time and cost
estimates can be improved when these variables are considered in making
the estimates. Estimates of time and cost together allow the manager to
develop a time-phased budget, which is imperative for project control.
Before discussing macro and micro estimating methods for times and costs,
a review of estimating guidelines will remind us of some of the important
“rules of the game” that can improve estimating.
page 138

5.2 Estimating Guidelines for Times, Costs,
and Resources

LO 5-2
Describe guidelines for estimating time, costs, and resources.

Managers recognize time, cost, and resource estimates must be accurate if
project planning, scheduling, and controlling are to be effective. However,
there is substantial evidence suggesting poor estimates are a major
contributor to projects that have failed. Therefore, every effort should be
made to see that initial estimates are as accurate as possible, since the
choice of no estimates leaves a great deal to luck and is not palatable to
serious project managers. Even though a project has never been done
before, a manager can follow seven guidelines to develop useful work
package estimates.
1. Responsibility. At the work package level, estimates should be made by
the person(s) most familiar with the task. Draw on their expertise! Except
for supertechnical tasks, those responsible for getting the job done on
schedule and within budget are usually first-line supervisors or
technicians who are experienced and familiar with the type of work
involved. These people will not have some preconceived, imposed
duration for a deliverable in mind. They will give an estimate based on
experience and best judgment. A secondary benefit of using those
responsible is the hope they will “buy in” to seeing that the estimate
materializes when they implement the work package. If those involved
are not consulted, it will be difficult to hold them responsible for failure
to achieve the estimated time. Finally, drawing on the expertise of team
members who will be responsible helps to build communication channels
early.
2. The use of several people to estimate. It is well known that a cost or
time estimate usually has a better chance of being reasonable and realistic
when several people with relevant experience and/or knowledge of the
task are used (sometimes called “crowdsourcing”). True, people bring
different biases based on their experience. But discussion of the
individual differences in their estimate leads to consensus and tends to
eliminate extreme estimate errors.

3. Normal conditions. When task time, cost, and resource estimates are
determined, they are based on certain assumptions. Estimates should be
based on normal conditions, efficient methods, and a normal level of
resources. Normal conditions are sometimes difficult to discern, but it is
necessary to have a consensus in the organization as to what normal
conditions mean in this project. If the normal workday is eight hours, the
time estimate should be based on an eight-hour day. Similarly, if the
normal workday is two shifts, the time estimate should be based on a
two-shift workday. Any time estimate should reflect efficient methods for
the resources normally available. The time estimate should represent the
normal level of resources—people or equipment. For example, if three
programmers are available for coding or two road graders are available
for road construction, time and cost estimates should be based on these
normal levels of resources unless it is anticipated the project will change
what is currently viewed as “normal.” In addition, possible conflicts in
demand for resources on parallel or concurrent activities should not be
considered at this stage. The need for adding resources will be examined
when resource scheduling is discussed in a later chapter.
4. Time units. Specific time units to use should be selected early in the
development phase of the project network. All task time estimates need
consistent time units. Estimates of time must consider whether normal
time is represented by calendar days, workdays, workweeks, person days,
single shift, hours, minutes, etc. In practice the use of workdays is the
dominant choice for expressing task duration. However, in projects such
as a heart transplant operation, minutes probably would be page 139
more appropriate as a time unit. One such project that used
minutes as the time unit was the movement of patients from an old
hospital to an elegant new one across town. Since there were several lifeendangering moves, minutes were used to ensure patient safety so that
proper emergency life-support systems would be available if needed. The
point is, network analysis requires a standard unit of time. When
computer programs allow more than one option, some notation should be
made of any variance from the standard unit of time. If the standard unit
of time is a five-day workweek and the estimated activity duration is in
calendar days, it must be converted to the normal workweek.
5. Independence. Estimators should treat each task as independent of other
tasks that might be integrated by the WBS. Use of first-line managers

usually results in considering tasks independently; this is good. Top
managers are prone to aggregate many tasks into one time estimate and
then deductively make the individual task time estimates add to the total.
If tasks are in a chain and performed by the same group or department, it
is best not to ask for all the time estimates in the sequence at once to
avoid the tendency for a planner or a supervisor to look at the whole path
and try to adjust individual task times in the sequence to meet an
arbitrary imposed schedule or some rough “guesstimate” of the total time
for the whole path or segment of the project. This tendency does not
reflect the uncertainties of individual activities and generally results in
optimistic task time estimates. In summary, each task time estimate
should be considered independently of other activities.
6. Contingencies. Work package estimates should not include allowances
for contingencies. The estimate should assume normal or average
conditions, even though every work package will not materialize as
planned. For this reason top management needs to create an extra fund
for contingencies that can be used to cover unforeseen events.
7. Risk assessment added to the estimate to avoid surprises to
stakeholders. It is obvious some tasks carry more time and cost risks
than others. For example, a new technology usually carries more time
and cost risks than a proven process. Simply identifying the degree of
risk lets stakeholders consider alternative methods and alter process
decisions. A simple breakdown by optimistic, most likely, and
pessimistic for task time could provide valuable information regarding
time and cost. See Chapter 7 for further discussion of project risk.
Where applicable, these guidelines will greatly help to avoid many of the
pitfalls found so often in practice.

5.3 Top-Down versus Bottom-Up Estimating
LO 5-3
Describe the methods, uses, and advantages and disadvantages of top-down and
bottom-up estimating methods.

Since estimating efforts cost money, the time and detail devoted to
estimating are important decisions. Yet when estimating is considered, you
as a project manager may hear statements such as these:
Rough order of magnitude is good enough. Spending time on detailed
estimating wastes money.
Time is everything; our survival depends on getting there first! Time and
cost accuracy is not an issue.
The project is internal. We don’t need to worry about cost.
The project is so small, we don’t need to bother with estimates. Just do it.
page 140

However, there are sound reasons for using top-down or bottom-up
estimates. Table 5.1 depicts conditions that suggest when one approach is
preferred over another.
TABLE 5.1
Conditions for Preferring Top-Down or Bottom-Up Time and Cost Estimates
Condition
Strategic decision making

Top-Down Estimates

Bottom-Up Estimates

X

Cost and time important

X

High uncertainty

X

Internal, small project

X

Fixed-price contract

X

Customer wants details

X

Unstable scope

X

Top-down estimates usually are derived from someone who uses
experience and/or information to determine the project duration and total
cost. However, these estimates are sometimes made by top managers who
have very little knowledge of the component activities used to complete the
project. For example, a mayor of a major city making a speech noted that a
new law building would be constructed at a cost of $23 million and would
be ready for occupancy in two and one-half years. Although the mayor

probably asked for an estimate from someone, the estimate could have
come from a luncheon meeting with a local contractor who wrote an
estimate (guesstimate) on a napkin. This is an extreme example, but in a
relative sense this scenario is frequently played out in practice. See
Snapshot from Practice 5.1: Portland Aerial Tram for another example of
this. The question actually is, do these estimates represent low-cost,
efficient methods? Seldom. The fact that the estimate came from the top can
influence people responsible to “do what it takes to make the estimate.”
If possible and practical, you want to push the estimating process down
to the work package level for bottom-up estimates that establish low-cost,
efficient methods. This process can take place after the project has been
defined in detail. Good sense suggests project estimates should come from
the people most knowledgeable about the estimate needed. The use of
several people with relevant experience with the task can improve the time
and cost estimate. The bottom-up approach at the work package level can
serve as a check on cost elements in the WBS by rolling up the work
packages and associated cost accounts to major deliverables. Similarly,
resource requirements can be checked. Later, the time, resource, and cost
estimates from the work packages can be consolidated into time-phased
networks, resource schedules, and budgets that are used for control.
The bottom-up approach also provides the customer with an opportunity
to compare the low-cost, efficient method approach with any imposed
restrictions. For example, if the project completion duration is imposed at
two years and your bottom-up analysis tells you the project will take two
and one-half years, the client can now consider the trade-off of the low-cost
method versus compressing the project to two years—or in rare cases
canceling the project. Similar trade-offs can be compared for different
levels of resources or increases in technical performance. The assumption is
any movement away from the low-cost, efficient method will increase costs
—e.g., overtime. The preferred approach in defining the project is to make
rough top-down estimates, develop the WBS/OBS, make bottom-up
estimates, develop schedules and budgets, and reconcile differences
between top-down and bottom-up estimates. These steps should be done
before final negotiation with either an internal or external customer. In
page 141
conclusion, the ideal approach is for the project manager to
allow enough time for both the top-down and bottom-up
estimates to be worked out so that a complete plan based on reliable

estimates can be offered to the customer. In this way false expectations are
minimized for all stakeholders and negotiation is reduced.

SNAPSHOT FROM PRACTICE 5.1
Portland Aerial Tram*
The Portland Tram is an aerial tramway in Portland, Oregon. The tram
carries passengers between the city’s south waterfront and the main
Oregon Health & Science University (OHSU) campus, which is located high
on a bluff overlooking the waterfront. The tram ride takes four minutes and
rises over 500 feet. The tram was jointly funded by OHSU, the city of Portland, and south
waterfront property owners.
OHSU was the driving force behind the project. OHSU argued that the tram was
needed so it could expand its operations to the south waterfront, where there were plans
to build several major facilities. The tram would also reduce traffic congestions and make
it easier for OHSU employees to commute to work. OHSU is a major player in the
Oregon economy, with an estimated annual economic impact of over $4 billion and over
35,000 jobs.
The OHSU tram would be one of only two city trams in the United States, and
advocates championed the idea that the tram would become an icon for the city like
Seattle’s Space Needle.
OHSU political clout helped gain approval by the Portland city council for the project
in 2003. The initial cost estimate was $15 million, with the city directly responsible for $2
million. A public review in 2004 revealed a new cost estimate of $18.5 million. A second
review in 2005 led to a cost readjustment of $40 million with a construction delay of six
months.
In 2006 a change in city leadership led to an independent audit being conducted on
the tram project. The audit revealed that OSHU managers knew as early as 2003 that
the cost of the tram would be in excess of $15.5 million but withheld the information from
city officials.
Public reaction was immediate and harsh. City Commissioner Randy Leonard
accused the OHSU leadership of an “outrageous shell game . . . all at the expense of
taxpayers.” The city of Portland threatened to pull out of the project. OHSU protested
vigorously, threatening a lawsuit, should the tram be canceled. Negotiations ensued.

Rigucci/Shutterstock
A revised funding plan and budget were agreed upon in April 2006, by a 3–2 vote of
the city council. This plan required concessions from all parties involved and called for a
final budget of $57 million, with direct contributions from the city of $8.5 million, or nearly
15 percent of the overall budget. This final budget was met, and the tram was opened to
the public January 27, 2007.
Budget concerns were not the only problem facing the tram project. Many residents in
the neighborhood beneath the tram were concerned that the tram would be an invasion
of privacy and lead to lower property values. The residents were promised that the
overhead power lines would be buried, but as a cost saving measure the plans were
scrapped. One irate homeowner living below the track placed a sign on his backyard
fence stating “F%&! The Tram.” The sign was not visible from the street, only from the
air. Lawsuits ensued.
The city ultimately negotiated with each resident living under the tramway and offered
fair market value for their homes.
* R. Gragg and A. Scott, “From Controversy to Icon: Portland’s Aerial Tram Turns 10,”
Oregon Broadcasting Network, February 12, 2017, www.opb.org/radio/. Accessed
2/14/19; S. Moore, “Audit: Tram Costs Shoot Skyward—Again,” Portland Mercury,
www.portlandmercury.com, February 2, 2006. Accessed 2/20/19; E. Njus, “Portland
Aerial Tram Marks Its 10th Anniversary,” Oregonian, www.oregon live.com. Accessed
2/2/19.
page 142

5.4 Methods for Estimating Project Times and
Costs
Top-Down Approaches for Estimating Project Times and
Costs

At the strategic level, top-down estimating methods are used to evaluate the
project proposal. Sometimes much of the information needed to derive
accurate time and cost estimates is not available in the initial phase of the
project—for example, design is not finalized. In these situations top-down
estimates are used until the tasks in the WBS are clearly defined.
Consensus Method
This method simply uses the pooled experience of senior and/or middle
managers to estimate the total project duration and cost. It typically
involves a meeting where experts discuss, argue, and ultimately reach a
decision as to their best guesstimate. Firms seeking greater rigor will use
the Delphi Method to make these macro estimates. See Snapshot from
Practice 5.2: The Delphi Method.

SNAPSHOT FROM PRACTICE 5.2
The Delphi Method
Originally developed by the RAND Corporation in 1969 for technological
forecasting, the Delphi Method is a group decision process about the
likelihood that certain events will occur. The Delphi Method makes use of a
panel of experts familiar with the kind of project in question. The notion is
that well-informed individuals, calling on their insights and experience, are better
equipped to estimate project costs/times than theoretical approaches or statistical
methods. Their responses to estimate questionnaires are anonymous, and they are
provided with a summary of opinions.
Experts are then encouraged to reconsider, and if appropriate, to change their
previous estimate in light of the replies of other experts. After two or three rounds it is
believed that the group will converge toward the “best” response through this consensus
process. The midpoint of responses is statistically categorized by the median score. In
each succeeding round of questionnaires, the range of responses by the panelists will
presumably decrease and the median will move toward what is deemed to be the
“correct” estimate.
A movie exec would use the Delphi Method to decide whether to invest in the
remaking of a classic film, like Gunga Din.1 He is concerned because both the
screenwriter and director insist on shooting the film on location in Rajasthan, India. He
recruits five experts who have worked on film projects overseas, two recently in India. He
provides each of them with a detailed summary proposal that describes the requirements
as well as the 75-day shooting schedule. He asks them to respond to an estimating
questionnaire concerning the costs of certain deliverables (e.g., accommodations, sets)
as well as total operational costs, ignoring the lead actors’ contracts. He is surprised by

the disparity between those who have worked in India and the others. After several
rounds, where opinions and ideas are exchanged, he has a fairly good idea of what the
total costs are likely to be as well as the risks involved. When he combines this
information with market research, he concludes that the project is not worth the
investment.
One distinct advantage of the Delphi Method is that the experts never need to be
brought together physically. The process also does not require complete agreement by
all panelists, since the majority opinion is represented by the median. Since the
responses are anonymous, the pitfalls of ego, domineering personalities, and the
bandwagon or halo effect in responses are all avoided.
1

Gunga Din is a 1939 adventure film that tells the tale of three British officers in
Rajasthan, India, who, thanks to a water boy (Gunga Din), survive a rebel revolt.
page 143

It is important to recognize that these first top-down estimates are only a
rough cut and typically occur in the “conceptual” stage of the project. The
top-down estimates are helpful in initial development of a complete plan.
However, such estimates are sometimes significantly off the mark because
little detailed information is gathered. At this level individual work items
are not identified. Or in a few cases the top-down estimates are not realistic
because top management “wants the project.” Nevertheless, the initial topdown estimates are helpful in determining whether the project warrants
more formal planning, which would include more detailed estimates. Be
careful that macro estimates made by senior managers are not dictated to
lower-level managers who might feel compelled to accept the estimates
even if they believe resources are inadequate.
Ratio Method
Top-down methods (sometimes called parametric) usually use ratios, or
surrogates, to estimate project times or costs. Top-down ratio methods are
often used in the concept, or “need,” phase of a project to get an initial
duration and cost estimate for the project. For example, contractors
frequently use number of square feet to estimate the cost and time to build a
house; that is, a house of 2,700 square feet might cost $160 per square foot
(2,700 feet × $160 per square foot equals $432,000). Likewise, knowing the
square feet and dollars per square foot, experience suggests it should take
approximately 100 days to complete. Two other common examples of top-

down cost estimates are the cost for a new plant estimated by capacity size
and a software product estimated by features and complexity.
Apportion Method
This method is an extension to the ratio method. Apportionment is used
when projects closely follow past projects in features and costs. Given good
historical data, estimates can be made quickly with little effort and
reasonable accuracy. This method is very common in projects that are
relatively standard but have some small variation or customization.
Anyone who has borrowed money from a bank to build a house has
been exposed to this process. Given an estimated total cost for the house,
banks and the FHA (Federal Housing Authority) authorize pay to the
contractor by completion of specific segments of the house. For example,
foundation might represent 3 percent of the total loan, framing 25 percent,
plumbing and heating 15 percent, etc. Payments are made as these items are
completed. An analogous process is used by some companies that apportion
costs to deliverables in the WBS—given average cost percentages from past
projects. Figure 5.1 presents an example similar to one found in practice.
Assuming the total project cost is estimated, using a top-down estimate, to
be $500,000, the costs are apportioned as a percentage of the total cost. For
example, the costs apportioned to the “Document” deliverable are 5 percent
of the total, or $25,000. The subdeliverables “Doc-1 and Doc-2” are
allocated 2 and 3 percent of the total—$10,000 and $15,000, respectively.
FIGURE 5.1
Structure

Apportion Method of Allocating Project Costs Using the Work Breakdown

Function Point Methods for Software and System Projects
In the software industry, software development projects are frequently
estimated using weighted macro variables called function points or major
parameters such as number of inputs, number of outputs, number of
inquiries, number of data files, and number of interfaces. These weighted
variables are adjusted for a complexity factor and added. The total adjusted
count provides the basis for estimating the labor effort and cost for page 144
a project (usually using a regression formula derived from data of
past projects). This latter method assumes adequate historical data by type
of software project for the industry—for example, MIS systems. In the U.S.
software industry, one person-month represents on average five function
points. A person working one month can generate on average (across all
types of software projects) about five function points. Of course, each
organization needs to develop its own average for its specific type of work.
Such historical data provide a basis for estimating the project duration.
Variations of this top-down approach are used by companies such as IBM,
Bank of America, Sears Roebuck, HP, AT&T, Ford Motors, GE, DuPont,
and many others. See Table 5.2 and Table 5.3 for a simplified example of
function point count methodology.
TABLE 5.2
Simplified Basic Function Point Count Process for a Prospective Project or Deliverable

From historical data the organization developed the weighting scheme
for complexity found in Table 5.2. Function points are derived from
multiplying the number of kinds of elements by weighted complexity.
Table 5.3 shows the data collected for a specific task or deliverable:
Patient Admitting and Billing—the number of inputs, outputs, inquiries,
files, and interfaces along with the expected complexity rating. Finally, the
application of the element count is applied and the function point count
total is 660. Given this count and the fact that 1 person-month has
historically been equal to 5 function points, the job will require 132 personpage 145
months (660/5 = 132). Assuming you have 10 programmers
who can work on this task, the duration would be
approximately 13 months. The cost is easily derived by multiplying the
labor rate per month times 132 person-months. For example, if the monthly
programmer rate is $8,000, then the estimated cost would be $1,056,000
(132 × 8,000). Although function point metrics are useful, their accuracy
depends on adequate historical data, the currency of the data, and the
relevancy of the project/deliverable to past averages.
TABLE 5.3
Example: Function Point Count Method

Learning Curves
Some projects require that the same task, group of tasks, or product be
repeated several times. Managers know intuitively that the time to perform
a task improves with repetition. This phenomenon is especially true of tasks
that are labor intensive. In these circumstances the pattern of improvement
phenomenon can be used to predict the reduction in time to perform the
task. From empirical evidence across all industries, the pattern of this
improvement has been quantified in the learning curve (also known as
improvement curve, experience curve, and industrial progress curve), which
is described by the following relationship:
Each time the output quantity doubles, the unit labor hours are reduced at a
constant rate.
In practice the improvement ratio may vary from 60 percent, representing
very large improvement, to 100 percent, representing no improvement at
all. Generally as the difficulty of the work decreases the expected
improvement also decreases and the improvement ratio that is used
becomes greater. One significant factor to consider is the proportion of
labor in the task in relation to machine-paced work. Obviously a lower
percentage of improvement can occur only in operations with high labor
content. Appendix 5.1 at the end of the chapter provides a detailed example
of how the improvement phenomenon can be used to estimate time and cost
for repetitive tasks.

The main disadvantage of top-down approaches to estimating is simply
that the time and cost for a specific task are not considered. Grouping many
tasks into a common basket encourages errors of omission and the use of
imposed times and costs.
Micro, bottom-up estimating methods are usually more accurate than
macro methods.
page 146

Bottom-Up Approaches for Estimating Project Times and
Costs
Template Method
If the project is similar to past projects, then template methods can be used
as a starting point for the new project. Templates are created based on the
costs of previous, similar projects. Differences in the new project can be
noted and past times and costs adjusted to reflect these differences. For
example, a ship repair drydock firm has a set of standard repair projects
(i.e., templates for overhaul, electrical, mechanical) that are used as starting
points for estimating the cost and duration of any new project. Differences
from the appropriate standardized project are noted (for times, costs, and
resources) and changes are made. This approach enables the firm to develop
a potential schedule, estimate costs, and develop a budget in a very short
time span. Development of such templates in a database can quickly reduce
estimate errors.
Parametric Procedures Applied to Specific Tasks
Just as parametric techniques such as cost per square foot can be the source
of top-down estimates, the same technique can be applied to specific tasks.
For example, as part of an MS Office conversion project, 36 different
computer workstations needed to be converted. Based on past conversion
projects, the project manager determined that on average one person could
convert three workstations per day. Therefore the task of converting the 36
workstations would take three technicians four days [(36/3)/3]. Similarly, to
estimate the wallpapering allowance on a house remodel, the contractor
figured a cost of $5 per square yard of wallpaper and $2 per yard to install
it, for a total cost of $7. By measuring the length and height of all the walls,
she was able to calculate the total area in square yards and multiply it by $7.

Range Estimating
When do you use range estimating? Range estimating works best when
work packages have significant uncertainty associated with the time or cost
to complete. If the work package is routine and carries little uncertainty,
using a person most familiar with the work package is usually the best
approach. He is likely to know best how to estimate work packages
durations and costs. However, when work packages have significant
uncertainty associated with the time or cost to complete, it is a prudent
policy to require three time estimates—low, average, and high (borrowed
from PERT methodology that uses probability distributions). The low to
high give a range within which the average estimate will fall. Determining
the low and high estimates for the activity is influenced by factors such as
complexity, technology, newness, and familiarity.
How do you get the estimates? Since range estimating works best for
work packages that have significant uncertainty, having a group determine
the low, average, and high cost or duration gives best results. Group
estimating tends to refine extremes by bringing more evaluative judgments
to the estimate and potential risks. The judgment of others in a group helps
to moderate extreme perceived risks associated with a time or cost estimate.
Involving others in making activity estimates gains buy-in and credibility to
the estimate.
Figure 5.2 presents an abridged estimating template using three time
estimates for work packages developed by a cross-functional group or
groups of project stakeholders. The group estimates show the low, average,
and high for each work package. The Risk Level column is the group’s
independent assessment of the degree of confidence that the actual time will
page 147
be very close to the estimate. In a sense this number represents
the group’s evaluation of many factors (e.g., complexity,
technology) that might impact the average time estimate. In our example,
the group feels work packages 104, 108, 110, 111, and 114 have a high
chance that the average time may vary from expected. Likewise, the group’s
confidence feels the risk of work packages 102, 105, and 112 not
materializing as expected is low.
FIGURE 5.2
Range Estimating Template

Source: Microsoft Excel

How do you use the estimate? Group range estimating gives the project
manager and owner an opportunity to assess the confidence associated with
project times (and/or costs). For example, a contractor responsible for
building a high-rise apartment building can tell the owner that the project
will cost between $3.5 and $4.1 million and take between six and nine
months to complete. The approach helps to reduce surprises as the project
progresses. The range estimating method also provides a basis for assessing
risk, managing resources, and determining the project contingency fund.
(See Chapter 7 for a discussion of contingency funds.) Range estimating is
popular in software and new product projects where up-front requirements
are fuzzy and not well known. Group range estimating is often used with
phase estimating, which is discussed next.

A Hybrid: Phase Estimating
This approach begins with a top-down estimate for the project and then
refines estimates for phases of the project as it is implemented. Some
projects by their nature cannot be rigorously defined because of the
uncertainty of design or the final product. These projects are often found in
aerospace projects, IT projects, new technology projects, and construction
projects where design is incomplete. In these projects, phase or life-cycle
estimating is frequently used.

Phase estimating is used when an unusual amount of uncertainty
surrounds a project and it is impractical to estimate times and costs for the
entire project. Phase estimating uses a two-estimate system over the life of
the project. A detailed estimate is developed for the immediate phase and a
macro estimate is made for the remaining phases of the project. Figure 5.3
depicts the phases of a project and the progression of estimates over its life.
page 148

FIGURE 5.3
Phase Estimating over Project Life Cycle

For example, when the project need is determined, a macro estimate of
the project cost and duration is made so analysis and decisions can be made.
Simultaneously a detailed estimate is made for deriving project
specifications and a macro estimate for the remainder of the project. As the
project progresses and specifications are solidified, a detailed estimate for
design is made and a macro estimate for the remainder of the project is
computed. Clearly, as the project progresses through its life cycle and more
information is available, the reliability of the estimates should be
improving. See Snapshot from Practice 5.3: Estimate Accuracy.
Phase estimating is preferred by those working on projects where the
final product is not known and the uncertainty is very large—for example,
the development of reusable rockets or domestic robots. The commitment to
cost and schedule is only necessary over the next phase of the project, and
commitment to unrealistic future schedules and costs based on poor
information is avoided. This progressive macro/micro method provides a

stronger basis for using schedule and cost estimates to manage progress
during the next phase.

SNAPSHOT FROM PRACTICE 5.3
Estimate Accuracy
The smaller the element of a work package, the more accurate the overall
estimate is likely to be. The extent of this improvement varies by type of
project. The following table is developed to reflect this observation. For
example, information technology projects that determine their time and cost
estimates in the conceptual stage can expect their “actuals” to err up to 200 percent over
cost and duration and, perhaps, as much as 30 percent under estimates. Conversely,
estimates for buildings, roads, and so on, made after the work packages are clearly
defined, have a smaller error in actual costs and times of 15 percent over estimate and 5
percent less than estimate. Although these estimates vary by project, they can serve as
ballpark numbers for project stakeholders selecting how project time and cost estimates
will be derived.
Time and Cost Estimate Accuracy by Type of Project
Bricks and Mortar

Information Technology

Conceptual stage

+60% to −30%

+200% to −30%

Deliverables defined

+30% to −15%

+100% to −15%

Work packages defined

+15% to − 5%

+ 50% to − 5%

page 149

Unfortunately, your customer—internal or external—will want an
accurate estimate of schedule and cost the moment the decision is made to
implement the project. Additionally, the customer who is paying for the
project often perceives phase estimating as a blank check because costs and
schedules are not firm over most of the project life cycle. Even though the
reasons for phase estimating are sound and legitimate, most customers have
to be sold on its legitimacy. A major advantage for the customer is the
opportunity to change features, re-evaluate the project, or even cancel it in
each new phase. In conclusion, phase estimating is very useful in projects

that possess huge uncertainties concerning the final nature (shape, size,
features) of the project.
See Figure 5.4 for a summary of the differences between top-down and
bottom-up estimates.
FIGURE 5.4
Top-Down and Bottom-Up Estimates

Obtaining accurate estimates is a challenge. Committed organizations
accept the challenge of coming up with meaningful estimates and invest
heavily in developing their capacity to do so. Accurate estimates reduce
uncertainty and support a discipline for effectively managing projects.

5.5 Level of Detail
Level of detail is different for different levels of management. At any level
the detail should be no more than is necessary and sufficient. Top
management interests usually center on the total project and major
milestone events that mark major accomplishments—for example, “build
oil platform in the north sea” or “complete prototype.” Middle management

might center on one segment of the project or one milestone. First-line
managers’ interests may be limited to one task or work package. One of the
beauties of WBS is the ability to aggregate network information so each
level of management can have the kind of information necessary to make
decisions.
Getting the level of detail in the WBS to match management needs for
effective implementation is crucial, but the delicate balance is difficult to
find. See Snapshot from Practice 5.4: Level of Detail. The level of detail in
page 150
the WBS varies with the complexity of the project; the need
for control; the project size, cost, and duration; and other
factors. If the structure reflects excessive detail, there is a tendency to break
the work effort into department assignments. This tendency can become a
barrier to success, since the emphasis will be on departmental outcomes
rather than on deliverable outcomes. Excessive detail also means more
unproductive paperwork. Note that if the level of the WBS is increased by
one, the number of cost accounts may increase geometrically. On the other
hand, if the level of detail is not adequate, an organization unit may find the
structure falls short of meeting its needs. Fortunately, the WBS has built-in
flexibility. Participating organization units may expand their portion of the
structure to meet their special needs. For example, the Engineering
Department may wish to further break their work on a deliverable into
smaller packages by electrical, civil, and mechanical. Similarly, the
Marketing Department may wish to break their new product promotion into
TV, radio, periodicals, and newspapers.

SNAPSHOT FROM PRACTICE 5.4
Level of Detail—Rule of Thumb
Practicing project managers advocate keeping the level of detail to a
minimum. But there are limits to this suggestion. One of the most frequent
errors of new project managers is to forget that the task time estimate will
be used to control schedule and cost performance. A frequent rule of
thumb used by practicing project managers says that a task duration should not exceed
5 workdays or at the most 10 workdays, if workdays are the time units used for the
project. Such a rule probably will result in a more detailed network, but the additional
detail pays off in controlling schedule and cost as the project progresses.

Suppose the task is “build prototype computer-controlled conveyor belt,” the time
estimate is 40 workdays, and the budget $300,000. It may be better to divide the task
into seven or eight smaller tasks for control purposes. If one of the smaller tasks gets
behind because of problems or a poor time estimate, it will be possible to take corrective
action quickly and avoid delaying successive tasks and the project. If the single task of
40 workdays is used, it is possible that no corrective action would be taken until day 40,
since many people have a tendency to “wait and see” or avoid admitting they are behind
or passing on bad news; the result may mean far more than 5 days behind schedule.
The 5- to 10-day rule of thumb applies to cost and performance goals. If using the
rule of thumb suggested in the previous paragraph results in too many network tasks, an
alternative is available, but it has conditions. The activity time can be extended beyond
the 5- to 10-day rule only if control monitoring checkpoints for segments of the task can
be established so clear measures of progress can be identified by a specific percent
complete.
This information is invaluable to the control process of measuring schedule and cost
performance—for example, payments for contract work are paid on “percent complete”
basis. Defining a task with clear definable start and end points and intermediate points
enhances the chances of early detection of problems, corrective action, and on-time
project completion.

5.6 Types of Costs
LO 5-4
Distinguish different kinds of costs associated with a project.

Assuming work packages are defined, detailed cost estimates can be made.
Here are typical kinds of costs found in a project:
1. Direct costs
a. Labor
b. Materials
c. Equipment
d. Other
2. Direct project overhead costs
3. General and administrative (G&A) overhead costs
page 151

The total project cost estimate is broken down in this fashion to sharpen the
control process and improve decision making.

Direct Costs
These costs are clearly chargeable to a specific work package. Direct costs
can be influenced by the project manager, project team, and individuals
implementing the work package. These costs represent real cash outflows
and must be paid as the project progresses; therefore, direct costs are
usually separated from overhead costs. Lower-level project rollups
frequently include only direct costs.

Direct Project Overhead Costs
Direct overhead rates more closely pinpoint which resources of the
organization are being used in the project. Direct project overhead costs
can be tied to project deliverables or work packages. Examples include the
salary of the project manager and temporary rental space for the project
team. Although overhead is not an immediate out-of-pocket expense, it is
real and must be covered in the long run if the firm is to remain viable.
These rates are usually a ratio of the dollar value of the resources used—
e.g., direct labor, materials, equipment. For example, a direct labor burden
rate of 20 percent would add a direct overhead charge of 20 percent to the
direct labor cost estimate. A direct charge rate of 50 percent for materials
would carry an additional 50 percent charge to the material cost estimate.
Selective direct overhead charges provide a more accurate project (job or
work package) cost than does using a blanket overhead rate for the whole
project.

General and Administrative (G&A) Overhead Costs
These represent organization costs that are not directly linked to a specific
project. They are carried for the duration of the project. Examples include
organization costs across all products and projects such as advertising,
accounting, and senior management above the project level. Allocation of
G&A costs varies from organization to organization. However, G&A costs
are usually allocated as a percent of total direct cost or a percent of the total
of a specific direct cost such as labor, materials, or equipment.

Given the totals of direct and overhead costs for individual work
packages, it is possible to cumulate the costs for any deliverable or for the
entire project. A percentage can be added for profit if you are a contractor.
A breakdown of costs for a proposed contract bid is presented in Figure 5.5.
FIGURE 5.5
Contract Bid Summary Costs
Direct costs

$80,000

Direct overhead

$20,000

Total direct costs

$100,000

G&A overhead (20%)

$20,000

Total costs

$120,000

Profit (20%)

$24,000

Total bid

$144,000

Perceptions of costs and budgets vary depending on their users. The
project manager must be very aware of these differences when setting up
the project budget and when communicating these differences to others.
page 152
Figure 5.6 depicts these different perceptions. The project
manager can commit costs months before the resource is used.
This information is useful to the financial officer of the organization in
forecasting future cash outflows. The project manager is interested in when
the budgeted cost is expected to occur and when the budgeted cost actually
is charged (earned); the respective timings of these two cost figures are used
to measure project schedule and cost variances.
FIGURE 5.6
Three Views of Cost

5.7 Refining Estimates
As described in Chapter 4, detailed work package estimates are aggregated
and “rolled up” by deliverable to estimate the total direct cost of the project.
Similarly, estimated durations are entered into the project network to
establish the project schedule and determine the overall duration of the
project. Experience tells us that for many projects the total estimates do not
materialize and the actual costs and schedule of some projects significantly
exceed original work package–based estimates. In order to compensate for
the problem of actual cost and schedule exceeding estimates, some project
managers adjust total costs by some multiplier (e.g., total estimated costs ×
1.20).
The practice of adjusting original estimates by 20 percent or even 100
percent begs the question of why, after investing so much time and energy
on detailed estimates, the numbers could be so far off. There are a number
of reasons for this, most of which can be traced to the estimating process
and the inherent uncertainty of predicting the future. Following are some of
those reasons.

Interaction costs are hidden in estimates. According to the guidelines,
each task estimate is supposed to be done independently. However, tasks
are rarely completed in a vacuum. Work on one task is dependent upon
prior tasks, and the hand-offs between tasks require time and attention.
For example, people working on prototype development need to interact
with design engineers after the design is completed, whether to simply
ask clarifying questions or to make adjustments in the original design.
Similarly, the time necessary to coordinate activities is typically not
reflected in independent estimates. Coordination is reflected in meetings
and briefings as well as time necessary to resolve disconnects page 153
between tasks. Time, and therefore cost, devoted to managing
interactions rises exponentially as the number of people and different
disciplines involved increases on a project.
Normal conditions do not apply. Estimates are supposed to be based on
normal conditions. While this is a good starting point, it rarely holds true
in real life, especially when it comes to the availability of resources.
Resource shortages, whether in the form of people, equipment, or
materials, can extend original estimates. For example, under normal
conditions four bulldozers are typically used to clear a certain site size in
five days, but the availability of only three bulldozers would extend the
task duration to eight days. Similarly, the decision to outsource certain
tasks can increase costs as well as extend task durations, since time is
added to acclimating outsiders to the particulars of the project and the
culture of the organization.
Things go wrong on projects. Design flaws are revealed after the fact,
extreme weather conditions occur, accidents happen, and so forth.
Although you shouldn’t plan for these risks to happen when estimating a
particular task, the likelihood and impact of such events need to be
considered.
Project scope and plans change. As one gets further and further into the
project, a manager obtains a better understanding of what needs to be
done to accomplish the project. This may lead to major changes in
project plans and costs. Likewise, if the project is a commercial project,
changes often have to be made midstream to respond to new demands by
the customer and/or competition. Unstable project scopes are a major
source of cost overruns. While every effort should be made up front to

nail down the project scope, it is becoming increasingly difficult to do so
in our rapidly changing world.
People are overly optimistic. There is solid research indicating that
people tend to overestimate how quickly they can get things done
(Buehler, Griffin, & Ross, 1994; Lovallo & Kahneman, 2003).
People engage in strategic misrepresentation. There is growing
evidence that some project promoters underestimate the costs of projects
and overestimate project benefits in order to win approval. This appears
to be particularly true for large-scale public works projects, which have a
notorious habit of coming in way over budget (remember Snapshot from
Practice 5.1: Portland Aerial Tram).
The reality is that for many projects not all of the information needed to
make accurate estimates is available, and it is impossible to predict the
future. The challenge is further compounded by human nature and the
political dynamics associated with gaining project approval. The dilemma is
that without solid estimates the credibility of the project plan is eroded.
Deadlines become meaningless, budgets become rubbery, and
accountability becomes problematic.
Such challenges will influence the final time and cost estimates. Even
with the best estimating efforts, it may be necessary to revise estimates
based on relevant information prior to establishing a baseline schedule and
budget.
Effective organizations adjust estimates of specific tasks once the risks,
resources, and particulars of the situation have been more clearly defined.
They recognize that the rolled-up estimates generated from a detailed
estimate based on the WBS are just the starting point. As they delve further
into the project-planning process, they make appropriate revisions in both
the time and cost of specific activities. They factor the final assignment of
resources into the project budget and schedule. For example, when they
page 154
realize that only three instead of four bulldozers are available
to clear a site, they adjust both the time and cost of that
activity. They adjust estimates to account for specific actions to mitigate
potential risks on the project. For example, to reduce the chances of design
code errors, they add the cost of independent testers to the schedule and
budget. Finally, organizations adjust estimates to take into account

abnormal conditions. For example, if soil samples reveal excessive ground
water, then they adjust foundation costs and times.
There will always be some mistakes, omissions, and adjustments that
will require additional changes in estimates. Fortunately, every project
should have a change management system in place to accommodate these
situations and any impact on the project baseline. Change management and
contingency funds will be discussed in Chapter 7.

5.8 Creating a Database for Estimating
LO 5-5
Suggest a scheme for developing an estimating database for future projects.

The best way to improve estimates is to collect and archive data on past
project estimates and actuals. Saving historical data—estimates and actuals
—provides a knowledge base for improving project time and cost
estimating. Creating an estimating database is a “best practice” among
leading project management organizations.
Some organizations, such as Boeing and IBM, have large estimating
departments of professional estimators that have developed large time and
cost databases. Others collect these data through the project office. This
database approach allows the project estimator to select a specific work
package item from the database for inclusion. The estimator then makes any
necessary adjustments concerning the materials, labor, and equipment. Of
course, any items not found in the database can be added to the project—
and ultimately to the database if desired. Again, the quality of the database
estimates depends upon the experience of the estimators, but over time the
data quality should improve. Such structured databases serve as feedback
for estimators and as benchmarks for cost and time for each project. In
addition, comparison of estimate and actual for different projects can
suggest the degree of risk inherent in estimates. See Figure 5.7 for the
structure of a database similar to those found in practice.

FIGURE 5.7
Estimating Database Templates

page 155

5.9 Mega Projects: A Special Case
LO 5-6
Understand the challenge of estimating mega projects and describe steps that lead to
better informed decisions.

Mega projects are large-scale, complex ventures that typically cost $1
billion or more, take many years to complete, and involve multiple private
and public stakeholders. They are often transformational, and impact
millions of people (Flyvbjerg, 2014). Examples include high-speed rail
lines, airports, healthcare reform, the Olympics, development of new
aircraft, and so forth. What do these projects have in common beyond scope
and complexity? They all tend to go way over budget and fall behind

schedule. For example, the new Denver airport that opened in 1995 had cost
overruns of 200 percent and was completed two years later than planned.
The “Chunnel,” the 31-mile-plus tunnel that connects France with England,
was 80 percent over budget. These are but two examples of many public
works and other large-scale projects in which costs came in way over than
planned. In a study of government infrastructure projects, Flyvbjerg found
costs for bridges and tunnels, roads, and rails to be underestimated 34
percent, 20 percent, and 45 percent, respectively, from baseline estimates
(Flyvbjerg, Bruzelius, & Rothengatter, 2003)!
Mega projects often involve a double whammy. Not only did they cost
much more than expected, but they underdelivered on benefits they were to
provide. The Denver airport realized only 55 percent of forecasted traffic
during its first year of operation. The Chunnel traffic revenues have been
one-half of what was predicted with internal rate of return of −14.5 percent!
Again Flyvbjerg’s study revealed a consistent pattern of underusage on
most infrastructure projects (Flyvbjerg et al., 2003), including only a 5
percent forecasted usage for the Kolkata (Calcutta) metro in India!
So why does there appear to be a consistent pattern of overestimating
benefits and underestimating costs? Many argue the sheer complexity and
long time horizon make it impossible to accurately estimate costs and
benefits. While this is certainly true, Flyvbjerg and his colleagues’ research
suggests that other factors come in to play. They concluded that in most
cases project promoters use deception to promote projects not for public
good but for personal gain, political or economic. Deception may be
deliberate, or may be the product of overzealousness, optimism, and
ignorance (Flyvbjerg et al., 2003). In some cases, promoters rationalize that
nothing great would ever get built if people knew in advance what the real
costs and challenges involved were (Hirschman, 1967).
On some mega projects, there is a triple whammy. Not only are they
over budget and under value, but the cost of maintaining them exceeds the
benefits received. These kinds of projects are called white elephants.

LO 5-7
Define a “white elephant” in project management and provide examples.

A “white elephant” suggests a valuable, but burdensome, possession,
which its owner cannot easily dispose of and whose cost (particularly
upkeep) is out of proportion with its usefulness. The term derives from the
story that the Kings of Siam (now Thailand) would often make a present of
a white elephant to courtiers who had fallen out of favor with the king. At
first glance, it was a great honor to receive such a revered beast from the
king. However, the true intent was to ruin the recipient by forcing him to
absorb the costs of taking care of the animal.
Examples of white elephants abound. While traveling across southern
China one of the authors was struck by the palatial stature of the Trade
Expo buildings each city had. It was as if each city had tried to outdo its
neighbor in terms of grandeur. When asked how often they were used, city
officials would say once or twice a year. The 2015 FIFA scandal brought
attention to the hidden costs of hosting the World Cup. South Africa built
six new world-class stadiums for the 2010 competition. None of the post–
World Cup revenue generated from these stadiums exceeds their
maintenance cost (Molloy & Chetty, 2015).
page 156

White elephants are not limited to buildings and stadiums. Air France
had to mothball the Concorde, the world’s fastest commercial airline,
because maintenance costs and noise restrictions did not justify a threeflights-a-week schedule. It is not uncommon in our personal lives to acquire
white elephants, such as underutilized vacation homes or yachts.
Flyvbjerg and others argue that cost overrun is not the price of doing big
things and that we are capable of making better informed decisions on mega
projects. The first step is to assume there is optimism bias and even
deception on the part of promoters. Proposals should require a thorough
review by impartial observers who do not have vested interest in the
project. Some if not all financial risk should be absorbed by promoters and
those who benefit financially from the project. Sustainable business
practices should be used and maintenance costs be integrated into the
forecasted cost/benefit analyses of projects. See Snapshot from Practice 5.5:
Avoiding the Curse of the White Elephant to see how British organizers
tried to avoid the curse of the white elephant in the 2012 Olympic games.

In particular, Flyvbjerg advocates an external view based on the
outcome of similar projects completed in the past. It is called reference
class forecasting (RCF) and involves three major steps:
1. Select a reference class of projects similar to your potential project, for
example, cargo ships or bridges.
2. Collect and arrange outcome data as a distribution. Create a distribution
of cost overruns as a percentage of the original project estimate (low to
high).
3. Use the distribution data to arrive at a realistic forecast. Compare the
original cost estimate for the project with the reference class projects.
Take, for example, a three-mile-long rail tunnel project. Tunnel advocates
estimate that it will cost $100 million. Analyses of similar tunnel projects
in the region indicate that on average they are 34 percent over budget. If
the proponents cannot come up with a reasonable explanation for why
this project will be different, decision makers should assume that the
tunnel will cost at least $134 million.
The benefits of RCF are compelling:
Outside empirical data mitigates human bias.
Political, strategic, and promoter forces have difficulty ignoring outside
RCF information.
RCF serves as a reality check for funding large projects.
RCF helps executives avoid unsound optimism.
RCF leads to improved accountability.
RCF provides a basis for project contingency funds.
The use of RCF is increasing as governments and organizations require this
method be used to temper project promoters’ estimates and reduce
cost/benefit inaccuracies.
page 157

SNAPSHOT FROM PRACTICE 5.5

Avoiding the Curse of the White Elephant*
Once, hosting the Olympics was considered the crown prize and a
tremendous source of national pride. Seven cities competed to host the
1992 Winter Olympics. For the 2022 Winter Olympics only Beijing and
Almaty (Kazakhstan) submitted bids. Oslo (Norway), the favorite, withdrew
application due to a lack of public support. Likewise, Boston withdrew application for the
2024 Summer Olympics in the face of public outcry.
Why the outcry? Because of the legacy of exorbitant cost overruns and draining
maintenance costs. The Olympics has a long history of expensive white elephants. For
example, the Beijing National Stadium, nicknamed the Bird’s Nest, built at a cost of $480
million for the 2008 Olympic games, requires over $10 million each year to maintain and
has no regular tenant.
Some have attributed the Greek economic meltdown to exorbitant debt accrued from
hosting the 2004 summer games (Flyvbjerg, 2014). “It felt good at the time because we
were the center of the world, and we got to show off our country,” says gymnast Christos
Libanovnos of the Hellenic Gymnastics Federation. “But what did it cost? So much
money—billions of euros. And now we are bankrupt, and everything just gets worse and
worse every day. It’s hard not to see a connection. It’s hard not to think that maybe it
wasn’t worth it.”1
Perhaps the most infamous example of an Olympic white elephant is the 1976
Montreal Olympic Stadium. Originally nicknamed the Big O, due to its unique doughnut
design, the stadium soon became known across Canada as the Big Owe. Estimated to
cost $134 million, it took Canadian taxpayers 30 years to pay off the final $1.1 billion
debt. To make matters worse, the stadium was not completely finished by the time the
Olympics opened. The stadium has not had a main tenant since 2004, when the
successful Montreal Expos moved to Washington, D.C.
The London 2012 Olympics organizers were committed to reducing the Olympic
financial hangover. In particular, they were well aware of hidden post-Olympic
maintenance costs of buildings that were no longer in demand. One advantage they had
over less developed countries is that the infrastructure and many of the arenas were
already in place and the Olympics provided a necessary upgrade. They built temporary
arenas for less popular sports. For example, after the games the water polo arena was
deconstructed and materials recycled. The 12,000-seat basketball arena was designed
to be portable so it could be used in future Olympics. Scalability was another key
consideration. For example, during the Olympics over 17,000 people watched swimming
events in the newly constructed aquatic center. The aquatic center was downsized to a
2,500-person capacity after the Olympics and is now open to the public.

© Sophie Vigneault /123RF
In recognition of its achievements, London 2012 Olympics won Gold in the
Environmental and Sustainability category of the 6th International Sports Events awards.
“We set out with a huge promise to the world, to deliver the most sustainable Olympic
Games of modern times,” says David Stubbs, London 2012’s Head of Sustainability.
“Seven years, nine million visitors, and 2,484 medals later, that’s exactly what we
achieved.”
1

Sanborn, J., “Was It Worth It? Debit-Ridden Greeks Question the Cost of the 2004
Olympics,” Time, July 9, 2012, p. 33.
* “London 2012’s Sustainability Legacy Lives On,” Olympic.org. Accessed 10/10/15.
page 158

Summary
Quality time and cost estimates are the bedrock of project control. Past
experience is the best starting point for these estimates. The quality of
estimates is influenced by other factors such as people, technology, and
downtimes. Companies that excel record past experiences and create an
estimation database that provides quick and accurate information on the
cost of specific work packages.
Using top-down estimates is good for initial and strategic decision
making or in situations where the costs associated with developing better
estimates have little benefit. However, in most cases the bottom-up
approach to estimating is preferred and more reliable because it assesses
each work package, rather than the whole project, section, or deliverable of
a project. Estimating time and costs for each work package facilitates
development of the project schedule and a time-phased budget, which are

needed to control the project as it is implemented. Using the estimating
guidelines will help eliminate many common mistakes made by those
unacquainted with estimating times and costs for project control.
The level of time and cost detail should follow the old phrase “no more
than is necessary and sufficient.” Managers must remember to differentiate
among committed outlays, actual costs, and scheduled costs. It is well
known that up-front efforts in clearly defining project objectives, scope, and
specifications vastly improve time and cost estimate accuracy.
Culture plays a significant role in estimating. If the focus is on what
went wrong instead of who is to blame, then people should be more
forthright in sharing their experiences and insights. However, if you work in
a punitive organizational culture that is only concerned with results, you are
likely to be much more guarded in what you share and may even pad
estimates out of self-protection.
Finally, large-scale mega projects like subway systems or football
stadiums often suffer from underestimated costs and overestimated benefits.
They also can evolve into white elephants whose cost of maintenance
exceeds benefits. Steps must be taken to remove bias and compare mega
project estimates with similar projects that have been done in the past.

Key Terms
Apportionment, 143
Bottom-up estimates, 140
Delphi Method, 142
Direct costs, 151
Function points, 143
Learning curve, 145
Overhead costs, 151
Phase estimating, 147
Range estimating, 146
Ratio method, 143
Reference class forecasting (RCF), 157

Commission a break-even study for the laser printer.
Very little in the way of concrete savings was identified, although there
was consensus that time could be compressed to the market launch date, but
at additional costs.
Lauren met with the marketing (Connor), production (Kim), and design
(Gage) managers, who yielded some ideas for cutting costs, but nothing
significant enough to have a large impact. Gage remarked, “I wouldn’t want
to be the one to deliver the message to top management that their cost
estimate is $1,250,000 off! Good luck, Lauren.”
1. At this point, what would you do if you were the project manager?
2. Was top management acting correctly in developing an estimate?
3. What estimating techniques should be used for a mission-critical project
such as this?
Case 5.2

Post-Graduation Adventure
Josh and Mike met as roommates during freshman year at Macalester
College in St. Paul, Minnesota. Despite a rocky start they became best
friends. They are planning a two-week adventure together to celebrate their
graduation in June. Josh has never been to Europe and wants to visit France
or Spain. Mike spent a semester abroad in Aarhus, Denmark, and traveled
extensively in northern Europe. Even though Mike has never been to France
or Spain, he wants to go to someplace more exotic, like South Africa or
Vietnam. For the past week they have been arguing over where they should
go. Josh argues that it will cost too much to fly to South Africa or Vietnam,
while Mike counters that it will be much cheaper to travel in Vietnam or
South Africa once they are there. They agree that they can spend no more
than $3,500 each on the trip and could be gone for only two weeks.

One evening when they were arguing with each other over beers with
friends, Sara said, “Why don’t you use what you learned in your project
management class to decide what to do?” Josh and Mike looked at each
other and agreed that made perfect sense.
1. Assume you are either Mike or Josh; how would you go about making a
decision using project management methodology?
2. Looking first at only cost, what decision would you make?
3. After cost, what other factors should be considered before making a
decision?
page 164

Appendix 5.1

LEARNING OBJECTIVES
After reading this chapter you should be able to:
A5-1

Use learning curves to improve task estimates.

LO A5-1
Use learning curves to improve task estimates.

Learning Curves for Estimating
A forecast estimate of the time required to perform a work package or task
is a basic necessity for scheduling the project. In some cases the manager
simply uses judgment and past experience to estimate work package time or
uses historical records of similar tasks.

Purchase answer to see full
attachment